Amendments to the Corporate Governance code for listed companies
This Corporate Governance code, applicable to listed German companies, replaces the earlier text, dating from May 2015. This new version emphasizes the increasing importance of institutional investors for companies and introduces certain nuances affecting management and supervisory boards, transparency and financial information.
The code is governed by the “comply or explain” principle, such that companies must publish an annual report on compliance with their recommendations or else explain the reasons for non-compliance with these.
The Management Board is responsible for developing company strategy in conjunction with the supervisory board, and of ensuring it is actioned. It is also in charge of verifying that the institution complies with legal provisions and corporate policies; it must act at all times in the best interests of its shareholders, employees and other stakeholders, with the goal of creating value that is sustainable over time.
A new feature of the code is the duty upon this body of determining appropriate measures for identifying the company’s risk policy, and of setting up a whistleblowing mechanism for employees.
As with the 2015 code, the new text does not set a specific number of management board members, but it does establish that there must be an appropriate allocation of responsibilities between all the individuals, and a clear specification as to which issues require an enhanced majority to pass a resolution.
The total remuneration, including fixed and variable components, received by members of the management board will be defined by the supervisory board, and reviewed regularly by them.
The new code adds that, since the components of the variable remuneration package tend to be measured over several years and to be of an intrinsically prospective nature, both positive and negative scenarios should be considered when determining them. Even so, under no circumstances will early disbursements be allowed in the case of variable remuneration spread over several years.
The supervisory board makes recommendations to and regularly supervises the management board, and must be involved in all important decisions affecting the institution.
Its responsibilities include appointing the members of the Management Board, ensuring there is an appropriate gender balance in the posts. Together with the Management Board, it is in charge of ensuring the succession of the members of that Board. In addition, it is empowered to set an age limit for serving as a member of the management board.
There is a specific reference to the chair of the supervisory board, who must be available to discuss such issues as the investors wish, and should act as the direct contact with the members of the board when discussing matters relating to strategy, business expansion or the company’s risk management.
The Shareholders Meeting will have the power to appoint members of the supervisory board, once it has received a proposal from this board with the profile of the skills and experience required to ensure the efficient discharge of duties. Insofar as it is possible, the Supervisory board must do everything in its power to have a suitable number of independent members, while taking into account the company’s ownership structure.
The Shareholders’ Meeting’s proposal for new members of the supervisory board must be backed up by information about their career history, skills and experience, all of which will be posted on the company website and updated once a year.
As to restrictions, the code establishes that two former board members, at most, may occupy seats on the supervisory board when at least two years have passed since their appointment, unless they have been chosen by shareholders with more than 25% of the company’s voting rights.
Supervisory board members’ remuneration will be approved by the Shareholders’ Meeting and must be commensurate with their roles and the company’s situation. Information about each board member’s remuneration must be posted separately for each person, broken down by component.
- Support committees
To support their functions, the supervisory board may set up committees made up of members with the necessary experience. These committees will report regularly to the supervisory board through their President. Among others, it must set up an audit committee that monitors audit procedures, together with internal control, risk management and compliance systems.
The new code explicitly reinforces the work of this committee, which will be responsible for recommending to the supervisory board which company auditor to appoint, as well as for assessing the latter’s impartiality and other issues such as service provision, areas to be audited and fees agreed. The code makes an additional provision that the President of this committee must not be the same as the President of the supervisory board.
An appointments committee must also be set up, composed exclusively of shareholder representatives, in charge of recommending candidates to occupy supervisory board member posts.
Conflicts of interest
The document pays special attention to conflicts of interest, with the members of both boards being required to act in the company’s best interests rather than their own.
In the event of a conflict of interest, the members of the management board must inform the remaining members and the supervisory board. In fact, significant transactions carried out between the company and those with links to the governing body must be approved by the supervisory board.
The supervisory board will also report to the remaining board members in the event of a conflict of interest, and will include this event specifically, and the manner in which it has been dealt with, in its report to the Shareholders’ Meeting. Furthermore, any agreements or job contracts between a member of the supervisory board and the company must be approved by the latter.
Transparency and financial information
The code defends transparency as a fundamental tool for consolidating trust with domestic and international investors, clients, employees and other stakeholders. For example, it alludes to companies’ duty to post a calendar on their website giving prior notice of the forthcoming publication dates of annual reports, financial information, Shareholders’ Meetings, press conferences, etc.
Turning to financial information, the code states that these interest groups should be kept informed by means of the group’s consolidated financial statements, management report and interim reports, all of which should be put together by the management board, but audited and reviewed by the supervisory board.
The group’s consolidated financial statements and management report must be made available to the public 90 days before the end of the period, and the interim financial statements 45 days before the reporting period comes to an end.
Finally, for those companies not required to publish interim reports, the code states that even so, they should keep their shareholders informed throughout the year of any significant changes occurring in the firm.